07.07.202211:24 Forex Analysis & Reviews: Fed intends to continue tightening policy

The Federal Reserve is reportedly continuing its princess of raising interest rates. According to the minutes of the meeting released yesterday, officials no long want to wait nor hesitate in tightening monetary policy. Markets reacted calmly to this news because everyone already expected such a scenario.

This determination to keep raising interest rates to fight high inflation while sacrificing economic growth is an evidence of the paths politicians are willing to take to achieve their goals. Nevertheless, many investors bet that the Fed will reverse its course next year, stopping rate hikes earlier and reducing them by mid-2023.

The Fed raised interest rates by 75 basis points last month and said it intends to continue tightening policy in July. The gap is still between 50 to 75 basis points, and everything will depend on the situation in the economy. The main driver is inflation, which, committee members said may prompt an even more restrictive stance if the figure continues to shoot up.

Officials have acknowledged that a tighter policy could slow economic growth for a while, but argued that returning inflation to 2% was more important. As such, many raised their base rate to a target range of 1.5% to 1.75%. Fed Chairman Jerome Powell suggested that a similar increase could occur in July, which means that another increase of 50 or 75 basis points may be seen at the meeting on July 26-27.

The only one who did not support a 75-point rate hike was Kansas City Fed President Esther George, who advocated a more lenient policy tightening. But the latest statistics proved that the committee's decision was correct, as the price index for personal consumption expenditures, which the Fed uses for its inflation target, rose 6.3% since May 2021, more than three times the central bank's 2% target.

All this is unfavorable for risky assets, so there is no need to talk about purchases and attempts to correct the situation. In euro, only a return to 1.0250 will halt the developing bearish scenario. A consolidation above the level will open the prospects for recovery to 1.0290 and 1.0340, but even this will not allow the bulls to take control of the market. In the event of a further decline to 1.0160, euro will dip to 1.0110 and 1.0070.

As for pound, it is currently moving towards the 2020 low, and only a correction above 1.1970 will push it to 1.2020 and 1.2070, where buyers will face much more difficulties. If there is an even larger surge, the quote could reach 1.2120. But if sellers push pound to 1.1900, the price will dip to 1.1860, then head to 1.1820 and 1.1740.